Fit for 55 – what are the best ways to cut emissions?
As an interim target for reaching climate neutrality by 2050, the EU wants to tighten the emission reduction target from 40% to at least 55% by 2030. Although it seems that the EU will exceed the original target, this constitutes a major change. In particular, the way emission reductions are implemented has a major impact on how much the transition will cost and how these costs will be distributed between countries. At the same time, regulation must be stable. Unfortunately, the criteria for sustainable financing are turning out to be a threat to the required investments.
The EU will cut greenhouse gases through the Union’s common emissions trading system (ETS) and the Member States’ obligations concerning sectors outside the ETS – the so-called effort sharing sectors. The key questions in tightening the emissions target are how the obligations will be directed to different sectors and how successful and cost-effective they will be.
In the longer term, the rules on carbon sinks in land use (LULUCF) and their development will also play an increasingly crucial role. The European Commission is currently considering all these issues, and a number of legislative proposals are expected by summer 2021. The legislative package is being compiled under the heading Fit for 55.
The timetable for the consideration and entry into force of future proposals is still open. It is especially important to the Member States making rapid progress in climate action. Finland’s objective is to be climate neutral in 2035, that is, halfway through to 2050. That is why the predictability of legislation over the next few years is of particular significance to Finland.
Emissions trading is a key steering measure – what happens to transport?
EU-wide emissions trading system mostly covers emissions from heavy industry and energy production and will continue to be a central, market-based and technology neutral steering tool. The target of 55% will significantly limit emissions from the ETS sector and speed up structural change.
The Commission is now planning to extend emissions trading to transport and heating of individual buildings. They are currently part of the effort sharing sector, where each Member State has specific emission reduction obligations until 2030. Finland’s obligation to reduce emissions by 39% from the 2005 level is already very high.
Whether the change would be good or bad for us depends on a number of factors, such as the relative level of emission reductions in different sectors and the way the changes are defined and implemented. Impact assessments are essential in this regard.
Transport is a key area for emissions reductions, regardless of whether it is part of the emissions trading system or not. It is essential to increase the cost of using fossil fuels, promote low-emission power sources and renew the vehicle fleet. In Finland, these measures can have a significant effect both on the price of transport and the State’s tax revenues, which must be taken into account. The impact on distribution of income is a very sensitive issue politically.
Energy directives need to be reformed carefully
Based on the National Energy and Climate Plans (NECPs), the EU would exceed its current renewable energy targets, but fall behind the energy efficiency targets by 2030. What should we do about this, bearing in mind that the use of energy causes three quarters of greenhouse gas emissions?
It is possible to tighten the renewable energy targets, but the Member States have the right to choose their own energy sources, including nuclear energy. However, the sustainability criteria laid down in the Directive must be predictable in the long term in order to enable investments.
While energy efficiency is an excellent thing, the current Directive measures it in part in a misleading way, that is, by the overall energy consumption at the level of the national economy. A flexible and integrated energy system of the future, which is based, for example, on renewable electricity and synthetic fuels, will inevitably require many energy transformations. The most important thing is to reduce emissions and to use natural resources in the most efficient way from that point of view. This should be taken into account when revising the rules.
EU Taxonomy threatens necessary investments
The climate transition requires massive investments in low-carbon solutions and technologies. The industrial and energy sectors require large amounts of capital and long-term investments, which is why the price of funding plays a crucial role.
The criteria for sustainable finance drafted by the Commission (so-called Taxonomy) will transfer a large part of clean energy investments to a less significant category. These may include investments related to bioenergy, electric fuels and renovation of buildings. The drafting of regulations on nuclear energy will take longer, but the signs are not good. The Commission’s view on hydropower, which is important to the Nordic countries, also seems harsh.
Financial institutions can, of course, continue to fund activities other than those defined as sustainable in the Taxonomy. However, the provisions have great potential effect on the price and availability of financing and, consequently, on the implementation of projects relevant to the climate.
In future, project funding could come from parties outside the EU, which have their own interests and conditions on the funding offered. At worst, the Taxonomy could hamper the use of EU recovery funds for climate action. Is this what the EU genuinely wants – to make climate investments more difficult and to use foreign capital in strategic projects?
In this regard too, it is necessary to respect the right of Member States to choose their own energy sources, as guaranteed by the EU Treaties, especially if the sources are clean and promote climate neutrality.
Other relevant measures include the challenging but important effort to reform EU provisions on energy taxation. Taxation has a key steering influence on the structure of energy use.
There has also been a lot of discussion about so-called carbon tariffs or carbon border mechanisms that could protect the internal market from unfair competition and carbon leakage. Despite the noble intentions, the use of these instruments may be challenging and difficult to direct properly. It is therefore positive that the principles on the use of carbon tariffs are now being considered as part of trade policy. Any use of border mechanisms must always be based on comprehensive overall consideration.
In other respects too, this reflects the greatest challenge of climate and energy policy: The EU and its Member States have at their disposal a wide range of instruments, whose development and application should be synchronised in order to increase their effectiveness. Translating the objectives into coherent action requires strong coordination, impact assessment and open dialogue.
Riku Huttunen is Director General of the Energy Department at the Ministry of Economic Affairs and Employment.